Passive Income: Fact or Fantasy?

You’re probably operating on a basic assumption right now that’s driving a lot of your career decisions.

Most people, even the brave entrepreneurs among us, assume that you’ve got a couple of distinct options when it comes to your work and life choices:

You have a job that you work at for decades, and then retire.

You start a business, and if you focus 110% of your energy on it, create something that allows you to escape the 9-to-5 and work on your own terms.

But there is a third option, and it’s caught the imaginations of many aspiring digital entrepreneurs in recent years (and inspired a great blog or two!). It’s the elusive approach to work that escapes both the work-retire paradigm, and the entrepreneurial grind. Sort of a mashup of the two.

You create something, a business or product or systematized service, that pays you after you’re done working on it.

In other words, a passive income.

Unlike working a job or running a business, a passive income frees up time for you to do essentially whatever you like. You can spend your days on stuff that doesn’t make you money, like making art, traveling the world, or hanging out with your kids all day. Sounds great right? Sign me up.

Here’s the thing.

It’s true we’ve reached a point with digital information, globalization, and automated software that you can game the system to some extent, escaping the age-old trap of trading time for income.

But creating a passive income is no cake walk. It will likely take a lot of learning, mistakes, time and, sometimes, money invested. As we’ve learned here at Foundr, and hopefully you’ve learned in your entrepreneurial adventure, everything takes work.

In fact, many (myself included) would say that the term “passive income” is a bit of a misnomer. Sure, these tactics become passive after a certain point, but there isn’t anything passive about getting to that point. And we’ve found that a set it and forget it approach to entrepreneurship almost always leads to a dead end.

4-hour workweek? We love you Tim, but we are aiming for a 0-hour work week!

With that said, there are certain areas that, if you play your cards right, are particularly ripe for setting up a systematized operation that once established makes money with a relatively low level of ongoing labor.

So here at Foundr, we’ve gathered up what we consider the six best methods for creating a passive income, for your consideration as you build your next not-a-business, not-a-job project.

Real Estate

Here’s an old-fashioned one, but still a workhorse. Lots of very rich people have built their fortunes buying and selling land, including the current president of theUnited States.

But can a regular guy or gal like you make it in the real estate market, and reap some passive income?

There are a few primary ways you can use real estate to generate money:

Gathering rents from tenants (not passive);

Flipping properties, that is, buying old properties and reselling them at a higher cost (sort of passive, but risky and expensive);

Hiring a real estate management company to gather rents for you.

Dealing with tenants, managing contractors for repairs, and all the while paying property taxes is hard. But there is a way to make real estate work for you, instead of working for real estate.

One secret is hiring a management company. By owning property and paying a reputable real estate management company to take care of day-to-day expenses, you’ll be able to reap profits while avoiding having to fix the sink or chase after tenants for next month’s rent.

Of course, one hurdle for this approach is that you’ll need some serious capital to get started—perhaps from savings or an inheritance you’ve received. After purchasing a property, you’ll then have to make it in good enough condition to lease, which might mean repairs and improvements.

But after that, the real estate management company will take care of the rest.

You just sit back, and start collecting money from rent minus the fees you need to pay thereal estate management company. That is what successful real estate investor Peter Giardini did, writing up a very helpful and honest blog post on the process here. He now helps run the Club Mastermind a real estate investing coaching program.

If you’re ambitious, you could add a few more properties to your portfolio.

You can buy and rent out many types of real estate, including detached homes, apartment buildings, office space, retail space, and the list goes on.

Another con to this method is that there is some risk involved. You can make a bad bet and buy a piece of real estate that no one is interested in renting. Or the real estate market could sink, making you lose money on your investment. But real estate investing is one of the most common ways people become wealthy, so why not you?

Affiliate Links

OK, now back to the bits and pixels of digital entrepreneurship, with a look at using affiliate links. Affiliate links are hidden everywhere. Maybe even in this article.

Affiliate links are an extremely popular way of creating income from online real estate, such as blogs, YouTube videos, and online games. The simple reason is that they are probably the quickest and easiest way to convert eyeballs into money.

“Check it out” → All affiliate links

Affiliate links are basically a type of commissioned advertising. The way it usually works is you include a personalized link to an outside company’s site, and get some percentage of the sales you generate when your existing readership/viewership uses your links. The example coming to mind is most likely Amazon, and yes, some bloggers and online content creators make great incomes using mainly Amazon or similar e-Commerceaffiliate links.

You probably have heard of these highly affiliate websites, but you didn’t know they were affiliate sites:

There are literally thousands of affiliate programs across every niche imaginable. Try it—type in “product/service name or category” + “affiliate program” in Google and there’s a very good chance you’ll come up with something.

Most of the time, all you’ve got to do is grab and drop a link on your online property. Sometimes, you might need to fill out a simple application form. But once you’ve got that link in there, assuming you’ve got a readership, all you’ve got to do is sit back and let the money roll in.

Of course, there’s the con/hard work element—you need to get the eyeballs. Simply putting up a blog and dropping in links won’t generate you much money.

The level of commission or return you make varies widely, so if you are just starting to build out an online property in the hopes of generating passive income, you’ll also want to do a bit of research into the types of affiliate programs available in that niche.

Another decent starting point is actually Wikipedia, whichhas a great list of different types of affiliate websites if you are trying to understand which direction to take your budding affiliate link empire.

Rather than spill more internet ink explaining how to get started, I’ll point you to the guru and acclaimed master of the affiliate marketing world:Pat Flynn, fromSmart Passive Income.

Dropshipping

Affiliate marketing has many advantages, but the biggest disadvantage is that you don’t control the level of commission you get, the conditions of that commission, and whether the product you are gaining commission on stays popular.

In other words, you don’t own the business that you’re profiting from; you’re just sucking up some residual income from its success. This means you are at the mercy of your affiliate partners. They might change their commission rates, cancel their commission program, or go bankrupt with no warning or input from you.

That’s why many people involved in selling a product would prefer to own that business or product. But at the same time, they don’t want to deal with the headache of managing a supply chain, product returns, and inventory.

Enter dropshipping.

Dropshipping allows you to run an e-commerce business without ever putting hands on a physical product. A company that specializes in dropshipping takes care of all of that instead. All you need to worry about is some customer support and the marketing, which can often be done with a minimal number of of hours a day. If you’ve already built up a readership, this can be a quick and efficient way of launching an e-commerce site without the headache.

Finding a good dropshipper is half of the battle. Some products don’t offer dropshipping at all. Some dropshippers are scammy, overly expensive, or have very bad communication.

To get started, check out this real-lifecase study by Shopify. They go through how they brainstormed a product, found a good brand name, found a great dropshipper and started a revenue-generating e-commerce store all in three days.

Dropshipping is an e-commerce technique used by companies big and small. Zappos started off with dropshipping back in 1999. Amazon offers a very popular dropshipping service called Fulfilled by Amazon (FBA). In fact, up to 33% of the entire e-commerce industry uses dropshipping as their primary inventory management model.

It takes a lot of work to set it up right. But if successful, this model provides income that is relatively passive, while leaving you with lots of control.

Peer-to-Peer Lending

Banks sure can be annoying, but you’ve got to admit that they’ve got a good thing going.

They charge money for keeping money—what could be better? Every year, banks make trillions off the interest, service charges, and penalties that customers pay for the privilege of storing money at their institutions, or borrowing money in the form of loans.

What if you could adopt a similar business model, but, you know, not be such a jerk about it.

Online peer-to-peer lending is a relatively new way that people are finding to circumvent banks. Generally, that means that the borrower is someone with maybe a not-so-great credit history, or they just may not have a lot of credit history. For that reason, you’re probably thinking that peer-to-peer lending is a risky business. But that can be minimized by going through a specialized peer-to-peer lending website, which leverages high-tech data analysis techniques to create sharper risk assessments.

In exchange for a fee, these websites will assess a borrower for you and give you an idea of the risk you’re taking, i.e. how likely it is that the borrower defaults on their loan. Higher the risk, the higher the return.

If you diversify your portfolio and lend out to a wide variety of borrowers, the potential to make good money is there. Best part is, lending and collecting interest off those loans is the very definition of passive income.

Getting started

You’ll need some capital, generally between $1,000 to $5,000. Here are two US-based, peer-to-peer brokers for those beginners out there:

There are other smaller and less well-known websites that also do peer-to-peer lending, but I’m going to recommend you stick to these two when starting out. Keep things safe at the beginning.

The global P2P lending marketing is growinglike crazy and is predicted to command $150 billion to $490 billion globally by 2020.

You can get a piece of that pie. Check out Nick Loper’s five-year review ofhow P2P lending did for his passive income.

Spoiler alert: He’s making an average return of 12.53% on his loans—not bad passive income at all.

Nick Loper’s Loan Performance

Outsourcing

Ever heard of that story of the computer programmer who outsourced his whole job to a programmer in China for less than a fifth of his salary.It’s a true story.

Instead of programming, he spent his day surfing the web and chilling out, all while making a six-figure salary (after paying his contractor).

If he can do it, why can’t you?

Outsourcing is a way of taking a job you currently have and making it into a passive source of income.

Here’s how to do it:

Get a job or create a job that allows you to work remotely;

Break up your job tasks into the smallest possible units—what do you need to do to get the job done?

Automate the pieces you can (e.g. could you automate those follow-up emails withRebump.cc)?

Outsource other components by finding Virtual Staff who work at wages less than what you make.

A great way to get started is becoming a freelancer or consultant, getting jobs, and outsourcing at least certain aspects of the work to someone else.

The simple equation is: Find clients paying you X amount and hire someone for X-1 amount to do the work.

To get started, you’ll probably need to be a freelancer or own a business of some kind already. It’s risky and more than a little shady to outsource your permanent employment, for security reasons, just for starters.

Ideally, you’ll develop a situation where your intimate knowledge of a field, strategic planning, and client/contractor connections serve as your ticket to passive income. Think of it almost like being a partner in a mini-virtual firm of your own making.

So once you’ve got a few freelance clients, find talented and trustworthy employees that charge less than what you make using sites like Upwork, Craigslist, and Fiverr.

After that, your only work would involve finding clients or managing them. But you could even outsource that and manage the person who is managing your outsourced business.

How deep does the outsourcing go? There’s only one way to find out, and you can’t outsource it!

Online Courses

Online courses are becoming the next big thing in passive income creation.

They involve the creation of non-actively managed online classes based upon your specific skillset. After creating the initial material, and aside from handling questions, the class can usually be updated sparingly.

There are online courses in nearly every domain, including business, programming, dating advice, and more. No matter what your expertise, it’s very likely you can turn it into a course and sell it.

Check out what’s going on in the biggest online course providers out there, including places like Udemy, Teachable and Courseminded. It’s a huge market, with Udemy boasting of over10 million students.

It’s a big lake, full of lots of small fish. But you can make it big if you find the right niche. Check out these two:

There you have it, a complete run-down of the top six best and most proven ways to generate passive income.

You can definitely see what I mean when I say there’s no free rides here. All of these methods require some level of hard work, expertise, or at the very least, money. If you’re expecting to whip up a blog, or call up a realtor, and then book your trip to Maui, well, that’s not really how entrepreneurship works.

And yet, with technology, ingenuity, and a little not-so-passive elbow grease early on, you can cobble together a finely tuned machine that will continue to deliver dividends long after you’ve hit the on switch.

But what do you think, Foundr family, is passive income a myth or a reality? Have you had any luck living the dream? Let us know below!

In response to your question. The answer is yes! It is possible. However, I can attest that in certain rare cases “set it and forget it” does work. I created a very niche SaaS website 6 years ago that took 1 week to create, users subscribe annually and renew annually automatically. While I am not able to retire from it, it does generate enough to cover extra expenses, decent vacations, etc. It’s what I call a “base hit”. My recommendation to anyone out there that wants to try any of these is to take a “base hit” approach. Don’t swing for the fences until you try out a few things that generate small amounts of income or actually fail. Learn, fail, learn, fail, repeat until you find success!

Thanks! Your well-thought-out article inspired me to think of a 6th way of getting “passive income”: planting trees! Some analysts feel that this is the highest-profit option for land use, whether the trees are to be felled for lumber / pulp or cherished for fruit / nut production, etc. (The sap of a eucalyptus is worth more than its timber is!) If planting trees goes viral, we may keep the planet inhabitable – and have a generous nest egg to retire on!